Buying from a family member under market value? You could be making a ‘Favourable Purchase’

When you’re buying property from a family member, there are times when you might be getting it for a lower than market price. Ahh”¦ family! This can be really helpful for you if you deal with a broker who gives you the rundown on what a “favourable purchase” means and which banks will consider this.

Let’s take my clients from a few years ago – let’s call them Peter and Nancy.

Pete and Nancy were buying a property from Pete’s uncle who had promised Pete the property for $210,000. Peter and Nancy had no savings to contribute to the property purchase (they had in fact been renting the very property they were going to buy).

Now the property was worth considerably more than $210,000, in fact an independent bank valuer (for a bank that was willing to consider a favourable purchase) thought that the property was worth $290,000.

So what that did was give Pete and Nancy $80,000 worth of instant equity in the property which allowed the bank to feel as though this was a low risk deal for them (with the applicants borrowing under 80% of the property’s value) and the bank approved the deal with no lender’s mortgage insurance – https://www.uploans.com.au/blog/2017/08/20/what-is-lenders-mortgage-insurance/

Now not all cases are as straight forward as Pete and Nancy’s – just recently we had a client who was buying from a relative and unfortunately even though they felt they were getting the property for a steal, the valuer didn’t think so. We gave the client’s the option to get another valuer out (for a different bank), but in this instance they opted not to and just went ahead with their existing deposit, but got no benefit from buying from a related party.

Important things to note:

  1. The right bank has to be chosen as some banks won’t care that you’re buying under market value, they’ll use the lower of the valuation or the contract price.
  2. The contract typically has to stipulate that it’s a “related party purchase” ie that
  3. Typically a favourable purchase must be from a relative or a relationship that is easily demonstrated to show why the property would be being purchased under market value.
  4. It’s important to speak to a solicitor early in the piece as stamp duty can be levied on the market value, not the price you pay to buy the property. 

In short though, your broker can step you through these minefields!